My Quarterly P2P Lending Results – Q2 2014

One of the many things I love about this business is its transparency. Anyone can download the entire loan history of Lending Club and Prosper and see how every single loan has performed. It is in this spirit of transparency that I bring you details of my own p2p investment returns each and every quarter.

This past quarter marked my five-year anniversary of investing in p2p lending. I started with just $500 and as I have become more comfortable with this investment I have added more money. Today, I have a very high level of comfort so I continue to add new money here. I have been slowly taking money out of the stock and bond markets and putting it to work in this industry.

Overall P2P Lending Return Now at 11.87%

Before I get into the details of my returns I want to give a quick overview for newcomers. I have had six accounts, four at Lending Club and two at Prosper for several years. These accounts have formed the core of my p2p lending portfolio and their results can be tracked back to the fourth quarter of 2011. Last quarter I introduced two new accounts into the mix. In February I opened a Prosper SMA account through Lend Academy Investments, my new wealth management firm, and last year I invested in the Direct Lending Income Fund, a fund that invests in small business loans.

Below is the quarterly table of all my p2p lending investments. I have continued to separate these two new accounts from the six established accounts – mainly so I can continue to track the overall returns of these core accounts. Speaking of which, last quarter was my first overall decline for my core accounts since I switched to a more aggressive investment approach three years ago. My overall return for my core accounts went down from 11.87% to 11.15%.

This was not unexpected although the magnitude of the drop did surprise me somewhat. Most of my core accounts had a larger than average number of defaults this past quarter, which led to lower returns across the board. You can see the details in the table below. You can see the table at full size and you can view the table with the extended return percentages here.

As you look at the above table you should take note of the following points:

All the account totals and interest numbers are taken from my monthly statements that I download each month.

The Net Interest column is the total interest earned plus late fees and recoveries less charge-offs.

The Average Age column shows how old, on average, the notes are in each portfolio. Because I am reinvesting all the time this number changes slowly.

The XIRR ROI column shows my real world return for the trailing 12 months (TTM). I believe the XIRR method is the best way to determine your actual return.

The two new accounts have been separated out to provide a level of continuity with my previous updates.

I do not take into account the impact of taxes.

Now, I will delve into the details on each of my accounts. I am also going to refer to my investment strategy for each account, so you will need to read my How I am Investing in 2014 post to be able to follow along.

Lending Club Main

This is a taxable account and was the first account I ever opened at Lending Club. Like many new investors I started this account in a conservative way, investing in mainly B and C grade loans. Now, as with most of my accounts I am focused on the more aggressive loans, typically D-grade and below. As I said above most of my accounts had a higher than average number of defaults and my main account was no exception.

The 27 defaults I incurred in the second quarter caused my real return to decline almost a full percentage point. And with 43 loans in the 31-120 days column I might see even more defaults than that this quarter. Below is a screenshot of my Adjusted Net Annual Returns for this account. Interestingly, this number has remained reasonably steady – it has been between 9.5% and 10% now for many months. In recent months I have been using P2P Picks exclusively to invest in this account.

Lending Club Roth IRA

I opened this account with a mission – to only invest in high interest notes and see what kind of return is possible with that strategy. The weighted average interest rate is 18.61% and I continue to stick with this strategy. I made my 2013 IRA contribution of $5,500 into this account in April and using my Lending Club Filter 1 it has taken a long time to invest. After noticing this I have recently increased the note size on this account from $25 to $50 and since then I am deploying cash more quickly.

While this account did have several defaults this past quarter the main reason for the drop in real return from 12.32% to 9.37% is because of this cash drag. This is something that any investor who adds significant new money into an account needs to weigh. I am ok with a temporary cash drag to keep to my aggressive loan selections.

Lending Club Traditional IRA

This account is in my wife’s name and is now over four years old. This account has also been my best performing account for several quarters but as I said in my last update I expected the returns to decline from their lofty levels. And that is what happened last quarter. Thanks to 40 new defaults on this account my real return has dropped from 13.61% to 11.91%. I have been using Lending Club Filters 2 and 3 to invest.

Lending Club Roth IRA – 2

This is my second Roth IRA – this one is my wife’s account. This was opened as a Lending Club PRIME account and has been my most conservative account until last year when I decided to manage the account myself and get more aggressive with it. At the time I also felt that Lending Club was doing a poor job with their PRIME service. That is no longer the case.

PRIME has been renamed simply Automated Investing and it is now an excellent service. I have been using it to invest now for several months and I have no complaints whatsoever. I have setup Lending Club’s Automated Investing with my Lending Club Filter 4 (Super Simple) and it invests in new notes for me pretty much every day, sometimes even twice a day. And the returns continue to edge up here as the more conservative loans get replaced with more aggressive loans with my reinvestments.

Prosper Main

This is my first Prosper account that was opened in 2010 as a taxable account. I have always focused on the higher interest loans in this account and it has been a consistently high performing account for me. And this quarter it has once again been the best performing account with a 12% real return. I use my Prosper Filters 1 and 2 to invest.

Prosper – 2

This has been, perhaps, my most interesting account. I have basically been running an experiment with this account for more than three years now. I have invested only $2,000 and so I have never considered this account to be well diversified. At the same time this account has the highest weighted average interest rate of 25.76% so it is investing in only the most aggressive notes. Just a year ago the real returns in this account stood at 15.87%. These days it is by far my worst performing account at a 5.12% real return. I have no plans to add new money to this account but I may make some minor adjustments. Today, I am investing a little less aggressively using my Prosper Filter 3 (Super Simple).

Prosper – New Roth IRA

I opened this account in February through my new firm, Lend Academy Investments, when I rolled over $50,000 from a Roth IRA. I decided I needed an account that was a little less aggressive, so this is using our balanced investment approach. Basically, this means I am investing in all loan grades but with an emphasis on A, B and C grade loans. My first returns number on Prosper has come in at 9.31%. My goal for this account is a 7% real return and so I am on target for that. I am using our proprietary Lend Academy algorithm to invest.

Direct Lending Income Fund

This has been my best performing p2p investment. Brendan Ross, who runs this fund, only invests in high yield small business loans and his target is a net return in the low teens. This account has been delivering those returns. Like most funds, this is a “set it and forget it” investment – Brendan takes care of all the investing, I just get a monthly statement each month with my balance. I have now had this account well over a year and am pleased with my nearly 14% return.

Final Thoughts

While some of you may expect that I would be disappointed with a decline in the returns of my core accounts, this is really not the case. While I would obviously like to receive fewer defaults, to maintain a return solidly in double digits is a good result. I will not be making any major adjustments to my accounts based on my results this past quarter.

These accounts are all on autopilot today. I am using automated investing now for all my accounts, so I am spending very little time day to day managing my own investing. I like this approach, particularly when it yields returns over 10%. Also, as I have said before I am no longer adding any new money to taxable accounts in this asset class. I want to remove the impact of taxes as much as possible and investing through retirement accounts allows me to do that.

One final note. Every quarter I like to highlight the one number I consider to be the most important – that of Net Interest earned. This is the money that shows the real gains in your account (before taxes). I am pleased this number has grown a great deal over the past year and now stands at $36,447 in the last 12 months. I want to continue to build that number every quarter.

He said “net interest,” which is net of defaults, in case you missed it. I imagine the total interest was somewhere north of 50k and 12-15k of defaults. And we don’t really get detail on total interest for the fund, just net returns.

Are you sure “net interest” takes into account principal lost to default? I have never heard anyone using “Net Interest” as Interest minus principal lost to default (one is interest income and other is capital loss, two different categories). You may be confusing net interest with net gains/loss.

Lending Club and Prosper do not report net interest as you mentioned anyway so Peter may have the principal lost to default numbers.

Bryce is correct. The Net Interest numbers are net of defaults. The total defaults in my six core accounts was $16,517. I do not include this number mainly for simplicity but happy to add it if people think it is worthwhile.

The other reason is what I have said again and again. This kind of investment is best suited to an IRA – in which case your net interest number will be exactly as I described.

Now, for my two new accounts I can this: My New Roth IRA received zero losses because it is so new. For the Direct Lending Income Fund I will not know my defaults until I get my K-1 after the end of the year.

This may be ticky-tacky but it appears you are showing your unadjusted retruns for all but one your LC accounts… do you not accrue for those portential losses when you calculate your returns? Also, why not track your XIRR since inception versus ttm?

No, I do not accrue these potential losses when I calculate my returns. There are many schools of thought for returns calculations – the historical XIRR over the TTM is what I like to use. But yes, an XIRR number since inception would be useful. I will see if I can include that next time.

Great update and five year anniversary, Peter. You’ve certainly trail-blazed this quarterly update process for many of us, particularly for me.

Similar to you, I’ve been using Lending Club’s automated investment tool, and also feel it’s doing remarkably better than the old PRIME function. I’m also getting sometimes 2-3 investments per day, including in enough of the rarer F & G grade notes. I’m not entirely convinced LC’s auto-invest gets equally choice F & Gs as a fast API tool like NSR because of their scarcity, but it does seem almost comparable on a macro level.

For what it’s worth, this was a solid dropped quarter for me as well (http://www.lendingmemo.com/returns-2014-q2/). Not necessarily bad (hard to complain about 11% returns), but a 1.5% drop was certainly a bit of a surprise. Similarly, my Prosper account is doing slightly better than LC.

Thanks Simon. It seems to me that the API investors do get slightly more loans than the Automated Investing users but the gap is definitely closely. I have to commend LC on taking a lousy product (the old PRIME) and turning it into a great tool.

Thank you for the update Peter. Certainly your willingness to share your personal investments have helped to shape and form the discussion, investment, and overall value of many readers, myself included over these past few years. Like Simon, it is why I bring to light my own returns in this space as they serve as a stark example to those who say good returns are imagined and provide new readers/investors the opportunity to witness how others are doing.

In reference to the conversation above regarding the presentation of net interest, I find that this is the most representative of actual returns. While net interest in and of itself might be a misnomer, I absolutely think you represent the net income provided as a result of your investment.

I built an automation site with lending club’s API and have been investing with it for about a year in only loans that historically get 15‰ to 18% ROI. I’m matching about 8 loans a day with my rules and still in the 15% to 16% NAR range (this includes manual investing using the same criteria for the previous 4 years). http://www.thinkfastsuit.com

I am an avid reader of your site. Thank you for posting this update and all your previous ones. Your transparency with your investing results have helped me to become more comfortable with investing in marketplace lending.

One question I have is where you are getting your “Average Age” for your Lending Club notes. Is this something that you calculate yourself or can it be found somewhere in Lending Club’s account page. I’ve looked and looked and can’t find anything, although it is easy for me to find this on Prosper’s site.

I’m curious, Peter, where p-2-p loans stand in your overall investment strategy. I’m not trying to pry, but your candidness is so refreshing (and helpful) elsewhere, I thought I’d ask. Do you keep p-2-p loans at a certain percentage of assets and rebalance on a particular timeline? Have you replaced previous short-term bond allocations with p-2-p loans? What asset classes have you lowered to invest in p-2-p loans?

Hi James, Good questions. While everyone has different goals and perspectives I can’t make any general recommendations here but I can tell you my own experience. Given that I have devoted my career to this industry I am planning on having a large exposure to this asset class.

I can easily see me getting to 25% or possibly even 50% of my assets in the broader online lending asset class – that includes consumer, small business and real estate loans. Right now I am well under 20% of my total assets but my percentage is growing all the time. Any new investing I do is only going into this asset class.

I have been moving money out of the bond and stock markets into p2p lending now for several years. While stocks will have the most money of any asset class I own for some time the percentage continues to go down. I have very little money in the bond market now – if I am loaning money to companies I will do it directly through the funds or platforms in this industry.

I saw the comment about an IRA being best suited to this type of investing and disagree. Perhaps for you it does but if you want to retire at say 45, an IRA doesn’t really do that much good as you get taxed and penalized at the end. By the time I retire(45) I imagine the law will have been changed to be 72 for retirement (if not later by extrapolating current rate of increase over time).

I disagree about your assessment. Presumably, if you have created enough wealth to retire at 45 then you will likely have created a large nest egg of both taxable dollars as well as IRA money. While I don’t know your personal situation, most wealthy people I know have more dollars outside their IRA/401(k). So, spending taxable money first and leaving all IRA intact until you turn 59 1/2 (this age requirement will change very slowly – if at all) will help avoid any penalties.

After opening up 2 accounts with Lending club I am very happy with the results.
The only part about this form of investing is that it is not very easy to liquidate and get access to funds if needed. Really best for IRA only.

You can’t sell any Lending Club IRA loans on Folio. And you can’t convert Lending Club loans in a Traditional IRA to a Roth IRA. The tax advantages may outweigh these disadvantages, but I would be loathe to put 60 month loans in my IRA, given the fact that I am stuck with them intact where they are for the full five years. Five years is a long time. A lot can happen both with the economy (and borrower’s jobs) and with interest rates and default rates in five years.

Kate, Everyone has their own tolerance for risk – I am comfortable allocating a portion of my portfolio to 5-year loans including in my IRA accounts. But I also know many people who stick to the 3-year loans for the very reason you describe.

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